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Debate about whether stimulus spending worked goes on, but we should be more choosy about what sort of jobs we're creating
Economics is all about demand and supply. Typically, the two are equal, and, if not, powerful forces push them towards each other. But, with high and persistent levels of unemployment in the United States, there is a real question about the nature of the problem: is aggregate demand too low, or are there problems with supply?
President Barack Obama's administration seems to think that the problem is one of demand, and has passed stimulus measure after stimulus measure, reducing taxes and increasing transfers and government spending in order to boost consumption and investment. The Federal Reserve is of a similar mind, not only maintaining rock-bottom short-term interest rates, but also embarking on an adventurous policy targeting long-term rates. Some progressive economists want even more.
Why have these policies not worked thus far in bringing down unemployment, even though the growth recovery is well under way? The progressive economist says that stimulus worked, staving off a much deeper recession "“ if not worse "“ but that the measures were too timid to generate a robust recovery.
The conservative economist responds that it is precisely because the government has become so free with taxpayers' money that households, fearful of future taxes, are hunkering down and increasing savings. Moreover, the increasingly activist government has left businesses uneasy about future regulatory and tax measures, and thus reluctant to invest.
The truth probably lies somewhere in between. Government spending "“ especially on unemployment benefits, aid to states, and some construction projects "“ probably helped avert a more wrenching downturn, but continued red ink worries households, which are also trying to rebuild savings and reduce debt after a spending binge. The regulatory uncertainty created in areas such as healthcare makes it difficult not only for the healthcare industry to make long-term investment decisions, but also for businesses to make long-term hires.
Nevertheless, before rushing to judgment about current policy, we should recognise the trend in recent US recoveries of slow job growth. From 1960 until 1991, recoveries from recessions in the US were typically rapid. From the trough of the recession, the economy recovered the lost jobs in eight months on average. The recoveries from the recessions of 1991 and 2001 were very different. For instance, in 2001, it took just one quarter for output to recover, but 38 months for jobs to come back.
Explanations abound. Some economists argue that, unlike past recessions, in which workers were temporarily laid off from an industry, only to be rehired as the recovery picked up, job losses starting in 1991 were more permanent. Matters were exacerbated by firms' postponement until a recession of hard choices about closing nonviable plants and shedding workers. As a result, unemployed workers had to find jobs in new industries, which took more time and training.
Others suggest that the internet has made it easier for firms to hire quickly. So, rather than hire in a panic at the first sign of recovery, as they did in the past, for fear that they will be unable to do so later and lose sales, firms today would rather ensure that the recovery is well-established before hiring. Hence, also, the growth in temporary hires today.
Regardless of what the right explanation is, the history of recent recessions suggests that we should not be surprised that the job recovery is taking time. There is, however, an aspect of the problem that is different this time: layoffs in construction. Therein lies an additional explanation for tepid job growth, as well as a salutary lesson about policy.
In the last boom, construction jobs expanded significantly, with investment in housing as a share of GDP increasing by 50% from 1997 to 2006. As my colleague Erik Hurst and his co-authors have shown, states that had the largest rise in construction as a share of GDP in 2000-2006 tended to have had the greatest contraction in that industry in 2006-2009. These states also tended to have the largest rise in unemployment rates between 2006 and 2009.
The unemployed comprise not only construction workers, but also ancillary workers, such as real-estate brokers and bankers, as well as all those who work on houses, such as plumbers and electricians. So, the job losses extend far beyond those in the construction industry.
It is hard to believe that any increase in aggregate demand will boost the housing market "“ which, remember, was buoyed by visions of steady price appreciation that few seem likely to hold today "“ sufficiently to re-employ all these workers. Hurst estimates that this "structural" unemployment may account for up to three percentage points of total unemployment. In other words, were it not for construction, the US unemployment rate would be 6.5% "“ a far healthier situation than today.
Policymakers should remember that the housing boom was fuelled by easy monetary policy, which sought to expand job growth as the US recovered from the last recession. Indeed, high-school graduation rates dropped in Las Vegas as people left school for readily available unskilled construction jobs. Now, those uneducated unemployed are experiencing more than three times the unemployment rate of college graduates. It will be very hard for them to return to the workforce.
The lesson for policymakers is clear: instead of constantly trying to boost spending and potentially creating problems for the future, a more sustainable way to improve job growth is to facilitate the "re-skilling" of the unemployed, especially those who were in construction-related jobs. Eventually, better labour-force supply will create healthier and more sustainable demand.
© Project Syndicate, 2011
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8 January 2011 1:14PM
Youth unemployment is rising and condem policies are making things worse - scrapping EMA, raising tuition fees, capping the number of university places, scrapping apprenticeship schemes. Any support for jobs will be, as always, too little, too late and too ideological. Jobs can not be created simply by cuts - and the Tories have no strategy for creating jobs.
8 January 2011 1:27PM
Create a Keynesian programme of Public Works to repair our neglected infrastructure and keep people employed and money in the economy.
8 January 2011 1:34PM
Economics is all about demand and supply
Economics surely encompasses the production, consumption, exchange and distribution of wealth, in which supply and demand is a model to determine price.
8 January 2011 1:41PM
your last sentence is crucial!So how can we have better labour-force?By our current rambling secondary-school students?By the pupils who still think in their ages playing is more important than studying but have been left behind by the asian counterparts?
8 January 2011 1:43PM
The lesson for policymakers is clear: instead of constantly trying to boost spending and potentially creating problems for the future, a more sustainable way to improve job growth is to facilitate the "re-skilling" of the unemployed, especially those who were in construction-related jobs.
I never EVER thought I would see an economist in the Guardian argue AGAINST boosting spending!
It may have taken 14 years but perhaps they are seeing the light.
8 January 2011 1:43PM
If politics is the art of the possible, then isn't it obvious by now that the main constraint upon it is economics? Simple cause and effect - well illustrated by the way that politicians so effortlessly work against their voters on behalf of the business community once they are in office. ...and the ceaseless lobbying that goes on outside parliament.
Britain is being re-adjusted to suit its proper place within a globalised system investment, manufacturing and consumption. This means that our expectations should change accordingly. This article's emphasis upon re-skilling as if the adjustment process was not taking place and a level playing field of costs existed is rather dated. It assumption of a national / cultural unit as an 'economy' is also simplistic. An 'economy' now means a systemic unit - a worldwide functioning network of relationships. Of course it can also mean a household, but that is hardly of much use here.
Those of you shouting at the tories / lib dems really should understand by now that the hard facts of life mean that all other mainstream parties would be doing the same right now if they held the reins. If you accept the basic logic of investment for profit, and all else follows.
Lack of investment in skills simply reflects the fact that the projected long term value of that kind of investment is not high relative to competing foreign 'factors of production'. Of course, no politician (or their pet economist) is going to come out and say that, are they?
8 January 2011 1:45PM
. Hurst estimates that this "structural" unemployment may account for up to three percentage points of total unemployment. In other words, were it not for construction, the US unemployment rate would be 6.5% "“ a far healthier situation than today.
I always love this kind of economic analysis becasue it bears little relation to the real world
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